Cooperative vs. Non-cooperative R&D under Uncertain Probability of Success*

Abstract R&D decision of a firm involves various sources of incomplete information. The present paper introduces incomplete information about the success probability of R&D in a model of two firms interacting in R&D and production and discusses the choice between cooperative and non-cooperative research. We consider research joint venture as the form of R&D cooperation. While the choice depends on the constellation of parameters, the following results are derived, in general. First, the high type firm always has a larger incentive for both cooperative and non-cooperative R&D compared to the low type firm. Second, if the low type firm goes for non-cooperative research, then the high type firm must go for the same, and if the high type firm prefers cooperative research, the low type firm must also prefer cooperative R&D. However, if the high type firm prefers non-cooperative R&D, the low type firm may go for either form of research depending on the parameters. The paper derives conditions, in particular, for the case when the high type firm prefers non-cooperative research whereas the low type firm prefers cooperative research.